Close the World Bank

and the IMF

Wall Street Journal Europe

April 13, 2000

by Kenneth R. Timmerman

When World Bank and International Monetary Fund leaders meet in Washington, DC next week, the only items on their agenda should one resolution to declare victory and another to dissolve both institutions. Then they should go home.

They may have to run through a gauntlet of picket lines erected by protestionist trade unions and assorted leftists, who also would like to see the bank close, though for different reasons. But even though the anti-trade forces have the wrong motivations, that doesn't mean the World Bank shouldn't shut its doors.

Created at Bretton Woods by the Allies in the final days of World War II, the World Bank and the IMF were initially conceived as a mechanism for rebuilding Europe after the devastation of World War II. In the late 1960s a new purpose was discovered that prolonged their existence: propping up Third World regimes on the front lines of the Cold War struggle between the Free World and Soviet communism.

Under the direction of current president James D. Wolfensohn, the World Bank now sees its mission as alleviating poverty and fighting corruption in developing nations. While these are equally high-minded goals, in reality World Bank lending has played a premier role in reinforcing both poverty and corruption in the very countries it has pretended to help.

An investigation I conducted for Reader's Digest over the past year found case after case of World Bank disasters, spawned by a system that is so hopelessly corrupt it cannot be reformed. World Bank development aid defined the term "white elephant" in the past 30 years. These were huge turnkey projects costing hundreds of millions of dollars that never produced a thing and in many cases were never even built, but which today must be repaid.

Zaire - now known as the Congo - is a case in point. It is now believed that the Swiss bank accounts controlled by former dictator Mobutu swelled to almost $4 billion during his reign, in direct proportion to World Bank aid. Today, the Congolese people are stuck with the bill.

Enriched cronies

In Indonesia, World Bank funds were used to shore up the military dictatorship of General Suharto, established as a bulwark against communist dominos. Over a twenty-five year period, the World Bank pumped close to $30 billion into Indonesia, building roads, schools, power plants, and sewage treatment plants, while enriching Suharto cronies. Though the infrastructure helped Indonesians, one fifth of the money was outright stolen. According to a confidential report prepared in August 1997 by the Bank's resident staff in Jakarta, at least $6 billion disappeared into the pockets of local government officials and politicians and must now be repaid - not by those officials, but by the people of Indonesia.

During the Cold War, said World Bank spokesman Peter Stevens, "corruption was tolerated as the cost of doing business." Unnerved by criticism from donor governments and from nongovernmental organizations, World Bank president James D. Wolfensohn announced an all-out assault on corrupt practices in late 1996, as the Bank sought new missions to justify its continued existence.

After a three year anti-corruption drive, the Bank unearthed problems involving 40 contracts worth a total of $40 million - a paltry sum compared to the 45,000 contracts the Bank finances annually, totaling roughly $45-50 billion. Former U.S. Senate investigator Jack Blum argues that the Bank's own numbers are proof that it has still not gotten serious about cracking down on waste, fraud and abuse. "In some countries, you're talking about 60% of the money just disappearing. Optimists say that a minimum of 10% of the loans goes down the rathole. That's $2 billion a year, at the very least."

Indonesia and Zaire are not the only cases where corrupt leaders have engaged in wholesale larceny at the expense of their people. In Russia corruption has become a way of government, with billions of dollars of international aid getting siphoned off into private offshore accounts.

Viktor Ilyukhin, the chairman of the National Security committee in Russia's parliament, has documented an August 1998 scheme that siphoned a $4.8 billion payment made to the Russian government by the International Monetary Fund, the sister organization of the World Bank. In a letter to Russia's federal prosecutor dated March 23, 1999, obtained by Reader's Digest, Ilyukhin laid out in detail how the funds were transferred from New York to Australia, to London and back to New York over a three day period, before they wound up in private accounts in Lausanne, Switzerland and were "used to bankroll the luxurious way of life of the Russian oligarchs."

Treasury Secretary Robert Rubin laconically confirmed Ilyukhin's allegations in Congressional testimony on March 18, 1999, saying that much of the $4.8 billion sent to Russia the previous August "may have been siphoned off improperly."

The Bank's massive commitment to Communist China - more than $31 billion since 1981 - is just as troubling. Over the past three years, the Bank has lent China nearly $3 billion per year, or nearly 15 percent of the total new loans, much of it at zero percent interest.

But many of these loans have been controversial because they have supported prison labor camps, forced population transfers to Tibet, or companies owned by the People's Liberation Army that masqueraded as entrepreneurial projects.. Ablajan Baret served once as a deputy commander of the Xinkiang Production and Construction Corp., a People's Liberation Army seed processing plant financed by a zero-interest World Bank loan in Chinese Turkestan, and now lives in the United States. He recalls meeting with a World Bank inspection team in 1991. "The World Bank provided our militia unit with seed, fertilizer, and farm equipment," Baret says. "But our real job was to police Muslim dissidents.

'No Uniforms'

Party officials gave Baret and his men explicit instructions how to receive the important visitors form the World Bank. "We were ordered not to wear militia uniforms, not to betray our identities as members of the communist party," Baret remembers. "We were told only to express our gratitude to the World Bank."

The conservative Heritage Foundation in Washington has released a study of 68 developing countries that have been receiving massive infusions of World Bank loans. The study found that 39 of those countries had only increased their Gross National Product by an average one percent per year from 1970 through 1997. In twenty countries, the economy had actually shrunk, despite World Bank support.

"Development aid does not help," says Heritage Foundation researcher Brett Schaifer. "What helps is economic freedom." Countries that have laws that protect investment, and ensure at least a minimum of financial accountability, do much better than countries that don't. "If you don't have economic freedom, no amount of development aid will stimulate growth," Schaifer argues. "If you do have economic freedom, then you don't need the money."

Concern over IMF and World Bank performance prompted Congress to appoint a bipartisan commission to suggest a package of reforms. The commission, headed by economist Allan Meltzer, made its recommendations on March 9: debt relief for the poorest of the poor, no more loans to relatively prosperous countries such as Communist China or Russia, and an end to long-term currency support.

While these are serious proposals, it is simply too late for yet another round of reform at the World Bank and the IMF. Congress should wake up to the fact that these institutions are dinosaurs left over from the Cold War. Instead of keeping them on life support, the U.S. should use its contributions to directly finance and manage development projects in the world's poorest countries, where it will do the most good.